In recent years, one of the more popular transactions that I have seen has been the acquisition of a residential condominium with the intent to rent it out. I recently read that in the second quarter of 2015, the rental of condominiums in the GTA has increased by 14% over the first quarter and overall is at its highest levels.
Most savvy investors know that they should have some real estate in their investment portfolios and a rental unit, depending on the circumstances, can provide for good cash flow while at the same time enjoying some long-term capital appreciation. These transactions, while attractive, do not come without its own issues and complications. This article is meant to highlight some of the issues and I encourage you to speak with your legal, tax, financial and realty advisors prior to embarking on one of these transactions.
One of the largest considerations is who is going to own the unit. By this I mean, should you put title into your name personally, or perhaps into the name of a holding company that you, your spouse or children own. The tax implications that will flow based upon “who” owns the unit is very important and needs to be thought through. These tax issues will involve not only the income and expenses during the time the unit is owned and rented, but will also have a material impact on the amount of capital gains to be paid upon the sale of the unit. Remember, the gains earned on the rental property will not be able to escape capital tax, as the unit will not qualify as for primary residence tax exemption.
Financing will also be a concern, especially if the unit is going to be held by a corporation. There are different lending requirements for rental units as opposed to an owner occupied property. I suggest that you advise your broker/lender as to your intentions for renting out the unit at the time of making the loan application, for lenders have specific lending requirements and you, as purchaser, will want to avoid issues on closing. For example, most lenders require you to sign a sworn statement regarding your intended use of the property. I find that this is the area that most purchasers get tripped up on, for this becomes apparent to them near the time of closing and at that point it is too late to change or back out of the deal. Also, if you are buying in the name of a corporation and it is a fairly new company with little or no financial history, be ready to sign personally as a guarantor.
When looking at potential units to purchase, be sure to speak with your realtor regarding what rents you can reasonably expect to receive. You want to be certain that whatever rent you collect, it will be enough to cover any mortgage, monthly common expenses and tax payment. You will also want a bit to end up in your pocket. It is also important to be the prudent landlord, so that that when it comes to the rental aspect of the transaction, you do your background checks on the prospective renter and be sure you have a rental agreement signed. You will need to notify the property management of the condominium that the unit is rented and most, if not all condominiums have particular documents that need to be completed when the unit is being rented.
If you plan on buying a new condominium from a builder, be sure to advise your legal advisor of this, as there are certain warranties, representations and HST issues that you will have to deal with, for new build condominiums are generally meant for the “owner occupier” buyer.
Overall, the purchase of a condominium unit for rental purposes can be a great investment, but like all investments, it requires careful consideration with full and frank discussions with your professional advisors.
Speak to a real estate lawyer today for residential and corporate real estate.